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The Impact of the Proposed Changes in Capital Gains Rates

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Much has been discussed in the media, and in family circles, regarding the potential implications of the “Bush tax cuts” set to expire at the end of 2012.  Not being tax folks, but interested in the impact, we decided to research the issue to get a layperson’s understanding of what exactly is supposed to change and how it might affect most people.  After much research, two sources proved to be the most helpful – the and the Goldman Sachs ( websites.  Here’s a summary of our key findings from these sources:


  • All of the primary Bush era income tax cuts are scheduled to expire at the end of 2012 under the law’s “sunset” provisions if Congress does not act (and “sunset” occurs).
  • While the Administration has proposed continuing to tax dividends at capital gains rates in the future, if no action is taken and sunset occurs, qualified dividends will be taxed at ordinary income rates instead of the lower capital gains rate at the end of 2012.

Potential Impact

  • The 2013 income tax rates for most taxpayers will increase.
  • Income tax rate changes from 2012 to 2013 that would result in the event of sunset are listed in the chart to the right (tax brackets for married couples filing jointly):
After giving effect to all the sur-taxes and stealth taxes, the effective tax rates for the highest bracket of earners will be as follows:
  1. Includes marginal income tax change, investment income surtax and stealth tax change
  2. Includes marginal income tax change, stealth tax  change and Medicare tax change

Proposed Tax Law Changes – A Detailed Look

  • The highest earners (>$379,150 of household income) will realize the largest tax % increases in 2013.
    • Ordinary income rate goes from 35% to 39.6% (a 13.1% increase)
    • Long-term capital gains rate goes from 15% to 20% (a 33.3% increase)
    • Qualified dividends rate goes from 15% to 39.6% (a 164% increase).
  • Itemized deductions to be less favorable
    • The tax rule reducing a taxpayer’s itemized deductions by a specified percentage of the amount by which adjusted gross income (AGI) exceeds a threshold does not apply in 2012 but returns in 2013. The limitation occurs on Schedule A, tax Form 1040.
    • In 2013, the reduction will equal the lesser of (i) 3% of that excess income or (ii) 80% of the itemized deductions (such as charitable contributions) subject to this rule.
    • For a taxpayer with $5 million of AGI in 2013, deductions will be reduced by about $145,000.
    • This rule is often referred to as a “stealth tax” because reducing deductions by 3% of the excess AGI potentially increases the 2013 marginal tax rate thereon from 39.6% to 40.8%.
  • Investment income may receive a 3.8% surtax for folks making >$200k.
    • The health care reform law enacted in 2010 includes a new 3.8% surtax on investment income (such as gains, interest and dividends) for individuals with AGI in excess of $200,000 and married couples with AGI in excess of $250,000. This surtax begins in 2013.
    • Surtax increases the top marginal rate on investment income, other than long-term capital gains (and possibly qualified dividends), to 43.4% (or 44.6% taking into account the aforementioned “stealth tax”).
    • Surtax increases top long-term capital gains rate to 23.8% (or 25% taking into account the “stealth tax”).

At first glance, it would appear that the wealthiest people are being punished the most.  Though some would argue that, based on the chart below, the rich have been getting favorable tax breaks for the last thirty years that are finally going away; here’s a chart of the historical Long Term Cap Gains tax rates per and the US Treasury Department:

Regardless of your opinion about the fairness and distribution of the tax changes, the implications are significant for all; be sure to consult with your tax advisor if these changes take place!

-James Timberview/

Disclaimer: As Goldman points out, information related to amounts and rates set forth under U.S. tax laws are drawn from current public sources, including Goldman Sachs’ April 2012 report on “The Potential Impact of Planned Tax Rate Increases on After Tax Values” and  the Internal Revenue Code of 1986, as amended, as well as regulations and other public pronouncements of the U.S. Treasury Department and Internal Revenue Service. Such information may be subject to change without notice. In some cases, rates may be estimated and may vary based on your particular circumstances.


Written by entrabanker

June 21, 2012 at 8:38 pm

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